Preparing for Due Diligence

Undergoing due diligence can be a daunting and time-consuming process for companies in the process of being sold or taking on investment.  This article sets out some useful information and practical steps to provide some guidance to those about to enter into the process.

THE BASICS

What is due diligence?

Due diligence is the process by which a potential purchaser or investor will investigate its target business.  It will typically involve the purchaser’s advisors raising a Questionnaire requesting detailed information and documentation concerning the company and its business under various headings.  Replies to the Questionnaire will usually be provided by way of a ‘virtual data room’, where information and documents are uploaded and access is given to the purchaser and investors and their advisors.

Often, there will be separate financial due diligence and legal due diligence processes and, depending on the sector, there may be additional industry specific questionnaires issued e.g. environmental, regulatory.

In many cases, the potential purchaser’s advisors will prepare a due diligence report, which the purchaser can then consider before making the final decision to enter into the transaction.

When does it happen?

Due diligence will usually commence after the parties have come to an agreement in principle on the terms of a deal but before legally binding contracts are entered into.  Crucially, no due diligence information should be made available to the potential purchaser or investor until they have executed an appropriate non-disclosure agreement to protect the confidentiality of the information disclosed.

What is the purpose?

The purpose of the exercise is to enable the potential purchaser or investor:

• to identify problem or risk areas;
• to gather information on the business;
• to assess the value of the business (and potentially look to negotiate on the purchase price if issues arise);
• to obtain the information required to draft the legal documents; and
• to identify any consents or approvals required to complete the proposed transaction.

Whilst the due diligence exercise is purchaser or investor driven, there are also benefits for the target company.  It is important and helpful to bear this in mind when going through the process.  Firstly, if there is an issue which might affect the particular party’s decision to proceed with the transaction, it is best that this be identified early to save time and costs for all.   Secondly, the due diligence process will ultimately frame specific disclosures which the sellers or target company will later make as part of the formal legal documentation.  In any transaction, the target company or its shareholders will generally be required to provide warranties, which are statements of fact in relation to the company and its business.  If any of the warranties are untrue or misleading, the purchaser or investor may have a claim for breach of warranty unless the particular matter has been disclosed to them in the Disclosure Letter (with certain exceptions).  Therefore, the due diligence process can ultimately assist those providing the warranties to limit any potential exposure.

HOW TO PREPARE AND DEALING WITH THE PROCESS?

Be organised

The work required can be greatly reduced when a company has been diligent in maintaining, storing and filing information and documents.  Where this is not the case, considerable time can be spent searching through company records or following up with Accountants or Solicitors to track down the specific information or documents required.

Allocate Responsibility

Be clear on who within an organisation or its advisory team is responsible for different areas, making sure there is no overlap and no gaps.  Consider what steps need to be taken to maintain confidentiality where appropriate.

Take advice early

If a potential issue is identified in the course of collating replies and documents, it is always best to take advice early, whether from your legal or financial advisors as appropriate.

Provide information and documents in stages

Providing the information in stages allows for a more timely and efficient process.  It also allows the opportunity for the company to retain more sensitive information until there is greater certainty that the transaction will proceed.

INFORMATION REQUIRED

Information will typically be requested under the following headings:

• Corporate Information
• Accounts
• Business and Trade
• Assets
• Banking and Finance
• Properties
• Employees
• Litigation
• Insurance
• Information Technology
• Intellectual Property
• Data Protection
• Compliance
• Health and Safety
• Environmental
• Connected Party Transactions

The extent of information required under each heading will depend on the nature of both the transaction and business concerned.

How we can help

For further information, please feel free to contact Eimear Grealy on 01 440 8300 / egrealy@bhsm.ie or Dasith Vithanage on 01 440 8300 / dvithanage@bhsm.ie.

This article is for general information purposes.  Legal advice must be obtained for individual circumstances.  Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies.